Three decades of Indonesia's economic growth (2)

Three decades of Indonesia's economic growth (2)

This is the second of four articles by Yoshihara Kunio, an
economics professor at Kyoto University's Center for Southeast
Asian Studies.

KYOTO, Japan (JP): It was in early 1972 when I visited
Indonesia for the first time. By that time, the economy had been
stabilized, and earnest efforts were being made to create a
dynamic economy. I had heard a lot about the American-trained
economists who came to the government from the University of
Indonesia and were playing a key role in policy formulation and
implementation.

The signs of progress were visible then. The economy had
grown at 6 percent in 1965-71; between 1965 and 1972, the ratio
of investment to GDP grew from 6 percent to 20 percent, and the
ratio of exports to GDP from 6 percent to 16 percent. Foreign
investment was surging into manufacturing industry. And
infrastructure was changing the people's mode of living. Roads
were being built in the countryside, and the small pick-up truck
(called "Colt") was becoming a popular mode of transportation.
Electricity was being extended to rural areas, and in major
cities like Jakarta, blackouts were becoming less common.

But the leftist and liberal intellectuals were criticizing the
country's new policy as well as the Soeharto administration. I
didn't belong to the group, but I was not sure whether the
progress made in the past several years would continue. The
economy kept improving in the rest of the 1970s, but even in the
early 1980s, I was still not sure whether progress was
sustainable. For one thing, the 1970s was a lucky decade for
Indonesia since there was a large oil price increase. Another
concern was the important position occupied by poorly performing
state enterprises in the economy. The third concern was a great
deal of corruption reported in connection with government
intervention and government-initiated programs.

But the economy performed better than I expected in the 1980s.
What made me think that Indonesian growth may be genuine is the high
growth in the past several years -- the period when high growth has
been made possible by making the economic system work better with
deregulation and liberalization. For example, the share of state-
owned banks in the commercial banking sector is not so dominant as
in the mid 1980s; and the big government sponsored project of a
conglomerate faces more difficulties in getting trade protection.

The following are the indicators of economic progress often
used in economic analysis. Between 1965 and 1933, the share of GDP
originating in agriculture declined from 52 percent to 18 percent;
the ratio of investment to GDP rose from 7 percent to 29 percent;
the ratio of exports to GDP rose from 6 percent to 30 percent; and
the share of manufactured exports rose from almost zero to 54
percent.

In rice, the country became self-sufficient in the mid-
1980s. The major reason for this was a rise in land productivity
with the introduction of new varieties of chemical fertilizer.
And many of the formerly rain-fed paddies were irrigated with
small diesel-operated irrigation pumps. As a result, rice
production per hectare doubled in Java between the mid-1950s and
the mid-1980s, rising from 1.5 to 3.0 tons.

Family planning was also effective in reducing the rate of
population growth. In the peak time of the early 1970s, the
population was growing at a rate of over 4 percent. Although the
peak time differed, all developing countries suffered from high
population growth in the post-war period. This was because the
balance between birth and death was disturbed. While the birth
rate remained roughly constant, the death rate declined with the
introduction of antibiotics, DDT, and modern medical techniques.
So, what needed to be done was to reduce the birth rate, and
family planning was its means. In Indonesia, the government was
so effective in its promotion that the rate of population growth
came down to 1.6 percent in the mid-1980s. Since then, the rate
has been stable roughly at that level.

Economic progress can be best summarized by the growth rate of
per capita GNP. In the period 1965-1990, according to the World
Bank, Indonesian per capita GNP grew at the rate of 4.5 percent,
which was one of the highest in the world. This rate was maintained
between 1990 and 1993. Because of such impressive growth, the World
Bank called Indonesia a "miracle" economy in the report issued in
1993.

A Filipino friend of mine was telling me in the early 1970s
that he and some other Filipinos often went to Indonesia to give
advice to the government or corporations there. They prided
themselves on being a more advanced nation in the region. For
quite some time in the post-war period, their income was the
second highest in Asia after Japan. In the mid 1960s, their
income was three times that of Indonesia.

But today, Indonesia has caught up with the Philippines. The
per capita GNPs of Indonesia and the Philippines are roughly the
same at US$900. What happened in the past three decades is that,
while Indonesia grew at a healthy rate, the Philippines stagnated
in the 1980s and early 1990s. The Philippines is often called the
basket case of Asia.

Despite high growth in the past three decades, however,
Indonesian income is still low compared with other countries.
Thailand is enjoying a per capita GNP of $2,400, Singapore,
$18,000, and Malaysia, $4,000. Comparison of incomes with
industrial countries must use purchasing power parity, since the
use of exchange rates exaggerates income difference. According to
the United Nations' Human Development Report 1994, in 1991, in
terms of purchasing power parity, Japan, Canada, Sweden,
Switzerland, and the United States were enjoying roughly $20,000
of per capita GDP, while Indonesia was at $2,730.

The report of the United Nations quoted above also ranks
countries in the world by the Human Development Index, which
incorporates, besides per capita GDP, life expectancy at birth,
adult literacy rate, and years of schooling. Out of the 173
countries, Indonesia ranks 105th, which is the second lowest of
the ASEAN countries after Vietnam (which ranks 116th).

The problem of Indonesia is that it started from a low base
in the mid-1960s. Despite a good growth record in the past three
decades, Indonesia has a lot of catching up to do.